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ECB President Christine Lagarde pushed back against rising market expectations for near-term rate hikes, signaling caution despite the energy shock from the Middle East conflict. Investors have increasingly priced the risk of tightening as the closure of the Strait of Hormuz drives fuel costs higher in the energy-importing Eurozone, but Lagarde made clear it is too early to draw firm policy conclusions.

Speaking to Bloomberg TV, Lagarde emphasized the high level of uncertainty and rejected attempts to lock in a policy path. “It doesn't predicate that we'll go in one direction or the other,” she said, adding that the current situation “certainly does not determine a rate path” at this stage. She also cautioned against overconfidence, noting that colleagues predicting a specific outcome “don't know, honestly.”

The ECB’s latest projections underscore the dilemma. While the baseline assumes the impact of the Iran war will be short-lived, alternative scenarios point to more persistent risks. In the adverse case, higher energy prices and broader spillovers could push inflation significantly higher, with the most extreme scenario seeing inflation reach 4.8% next year. Lagarde said the economy is currently “between the baseline and the adverse”.

The IMF has warned that the global economy faces a more prolonged and damaging shock if the Middle East conflict escalates, with oil prices potentially averaging as high as $125 in 2027 under a severe scenario. Crucially, this is not a short-lived spike but a sustained high-price environment, implying persistent inflation pressure and a more challenging policy backdrop.

Under its baseline assumption that the conflict remains limited, the IMF projects global growth to slow to 3.1% in 2026 before edging up to 3.2% in 2027. Inflation is expected to rise modestly in 2026 due to energy costs before resuming its decline. However, even this relatively benign scenario points to a fragile balance between slowing growth and lingering price pressures.

The severe scenario paints a much more concerning picture. Oil prices are projected to double relative to earlier assumptions and remain elevated, averaging around $110 in 2026 and $125 in 2027. At the same time, global headline inflation could climb to 5.8% in 2026 and exceed 6% in 2027, reflecting both higher energy costs and a rise in inflation expectations.

That rise in expectations is a key transmission channel. The IMF estimates that one-year-ahead inflation expectations could increase by up to 100 basis points in advanced economies and 130 basis points in emerging markets. This would reinforce price pressures and make it more difficult for central banks to bring inflation back under control.

Financial conditions would also tighten significantly. The IMF warned of a broad risk-off episode, with corporate credit spreads in advanced economies and China widening by around 100 basis points, while emerging markets could see sovereign spreads rise by a similar magnitude and corporate spreads by as much as 200 basis points.

Importantly, policy responses in such a scenario would be constrained. Rather than supporting growth, central banks would be forced to focus on containing inflation, even as activity weakens. This creates a classic stagflationary setup, where tightening financial conditions and elevated borrowing costs further weigh on economic momentum.

Even in the IMF’s adverse scenario, growth slows meaningfully to 2.5% in 2026, with oil averaging around $100 and inflation rising to 5.4%. This underscores that risks are already skewed to the downside, even without a full escalation.

Full IMF World Economic Outlook release here.

US producer prices rose in March, driven largely by a surge in energy costs, though the overall increase came in below expectations. Headline PPI climbed 0.5% mom, up from prior months but well short of the 1.2% mom forecast. On an annual basis, PPI accelerated from 3.4% yoy to 4.0% yoy, also missing expectations of 4.6% yoy, marking the largest 12-month gain since early 2023.

The details point to a clear energy-driven move rather than broad-based inflation pressure. Goods prices jumped 1.6% , with nearly half of the increase attributed to a 15.7% surge in gasoline prices. In contrast, services prices were unchanged, suggesting limited pass-through into the broader economy so far.

Underlying inflation measures were more contained. The index for final demand excluding foods, energy, and trade services rose just 0.2% mom, following stronger 0.5% gains in the prior two months. On a yearly basis, core PPI held at 3.6% yoy. The data reinforces the view that recent inflation pressures are being driven by volatile energy costs rather than a sustained pickup in underlying price momentum.

Full US PPI release here.